Cyprus finally got a deal done with the EU to bail out its troubled banking system last night.
Instead of levying a nationwide “tax” on bank deposits, the plan follows a more typical restructuring approach, seeing shareholders, bondholders, and uninsured depositors in the country’s two biggest banks take heavy losses in restructurings.
This way, Cyprus will avoid increasing its own public debt stock as much as it would have done if it were to take loans from the troika to finance the full amount of the bailout.
Officials at the IMF and German politicians like this approach because it is seen as a more sustainable approach to tackling the sovereign debt issues that plague many peripheral countries in the euro area.
Today, in an interview with Reuters and the Financial Times, Dutch Finance Minister and President of the Eurogroup of euro zone finance ministers Jeroen Dijsselbloem said that the Cyprus deal will serve as a template for future bank restructurings in the euro zone.
Reuters reporter Luke Baker has the scoop:
“What we’ve done last night is what I call pushing back the risks,” Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck.
“If there is a risk in a bank, our first question should be ‘OK, what are you in the bank going to do about that? What can you do to recapitalise yourself?’. If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders,” he said.
In short, though euro area leaders have stressed that the Cyprus deal was a special case, it’s becoming increasingly clear in the wake of negotiations that this is the new normal for euro zone bank restructurings.
Since the report hit the newswires, the euro has extended its losses against the U.S. dollar and is now down 0.75 per cent today.
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